BACC03:INCOME TAXATION

CHAPTER 1:
INTRODUCTION TO
TAXATION
PREPARED BY: RAFFY A. SANTOS, MBA &
AURIBETH B. LAPITAN
 LEARNING OBJECTIVES:
❖ Concept of taxation and its necessity for every
government
❖ Lifeblood doctrine and its implication to taxation
❖ Theories of government cost allocation
❖ Inherent power of the State
❖ Scope of the taxation power
❖Limitations of the taxation power
 WHAT IS TAXATION?
Taxation may be defined as a State
power, a legislative process, and a
mode of government cost distribution.
⮚ AS A STATE POWER
Taxation is an inherent power of the State to enforce a proportional
contribution from its subjects for public purpose.

⮚ AS A PROCESS
Taxation is a process of levying taxes by the legislature of the State to
enforce proportional contributions from its subjects for public purpose.

⮚ AS A MODE OF COST DISTRIBUTION

Taxation is a mode by which the State allocates its costs or burden to
its subjects who are benefited by its spending. The Theory of Taxation
Every government provides a vast array of public services including
defense, public order and safety, health, education, and social
protection among others.
A system of government is indispensable to every society.
Without it, the people will not relish the benefits of a
civilized and orderly society. However, a government
cannot exist without a system of funding. The
government's necessity for funding is the theory of
taxation.
❖ THE BASIS OF TAXATION
the government provides benefits to the people in the form of
public services, and the people provide the funds that finance
the government. This mutuality of support between the people
and the government is referred to as the basis of taxation.

❖ RECEIPT OF BENEFITS IS CONCLUSIVELY PRESUMED

means that every citizen and resident of a country benefits
from public services provided by the government, such as
infrastructure, education, healthcare, and security. These
benefits are presumed to be received by everyone, whether
directly or indirectly. Therefore, taxpayers cannot avoid paying
taxes by claiming they did not personally receive these benefits.
The fact that they live in a society supported by these services is
enough to require them to pay taxes.
THEORIES OF COST ALLOCATION
Taxation is a mode of allocating government costs or
burden to the people. In distributing the costs or burden,
the government regards the following general
considerations in the exercise of its taxation power:

1. BENEFIT RECEIVED THEORY

- presupposes that the more benefit one receives from the
government, the more taxes he should pay.
2. ABILITY TO PAY THEORY
- presupposes that taxation should also consider the taxpayer's
ability to pay. Taxpayers should be required to contribute based on
their relative capacity to sacrifice for the support of the government
ASPECTS OF THE ABILITY TO
PAY THEORY

1.VERTICAL EQUITY
- proposes that the extent of one's
ability to pay is directly proportional
to the level of his tax base.

For Example: Anna has

P200,000 income while Beth has
P400,000.
SCENARIO: VERTICAL EQUITY
Imagine three friends, Anna, Ben, and Charlie, decide
to split the cost of a birthday cake for their group.

The cost is ₱1,000, but they agree to pay based on

what they can afford:
 ANSWER:
1. Anna earns ₱10,000 a month and pays ₱100.
2. Ben earns ₱50,000 a month and pays ₱300.
3. Charlie earns ₱100,000 a month and pays ₱600.

This follows vertical equity because those who earn more contribute a bigger
share. Despite paying different amounts, the cake is shared equally among
them, and everyone enjoys it together.
2. HORIZONTAL EQUITY
- requires consideration of the particular circumstance of the
taxpayer.

FOR EXAMPLE: Businessmen A and B both have P300,000

income. A incurred P200,000 in business expenses while B
incurred only P50,000 business expenses.

TAKE NOTE: Vertical equity is a gross concept while horizontal equity is

a net concept.
SCENARIO: HORIZONTAL EQUITY
Imagine two friends, Liza and Mark, who both
earn ₱50,000 a month.

❑ Liza is single and has no dependents.

❑ Mark is married with two children and has
higher living expenses.
ANSWER:
Under horizontal equity, even though they earn the same
amount, their tax contributions should consider their
circumstances.

• Liza, with fewer responsibilities, pays ₱5,000 in taxes.

• Mark, supporting a family, pays only ₱3,000 in taxes.

This ensures fairness by taking into account that Mark has more
financial obligations despite having the same income as Liza.
THE INHERENT POWERS OF THE STATE

1. TAXATION POWER
- is the power of the State to enforce proportional
contribution from its subjects to sustain itself.
2. POLICE POWER
- is the general power of the State to enact laws to protect
the well-being of the people.
3. EMINENT DOMAIN
- is the power of the State to take private property for
public use after paying just compensation.
SCOPE OF THE TAXATION POWER
The scope of taxation is widely regarded as
comprehensive, plenary, unlimited and
supreme.

However, despite the seemingly unlimited

nature of taxation, it is not absolutely
unlimited. Taxation has its own inherent
limitations and limitations imposed by
the Constitution.
THE LIMITATIONS OF THE TAXATION POWER
A. INHERENT LIMITATIONS
1. TERRITORIALITY OF TAXATION
- states that a government can only impose taxes on
individuals and businesses within its territorial
jurisdiction. Since public services are provided within a state's
boundaries, taxation is limited to those who benefit from these
services. Taxing foreign entities outside the country's
jurisdiction would violate their sovereignty.
Taxpayers have two key obligations:
1. Filing returns and paying taxes
2. Withholding and remitting taxes on expenses
These obligations apply only to citizens and residents within the Philippines, as
enforcing them beyond national borders would infringe on foreign sovereignty.
SCENARIO: TERRITORIALITY OF TAXATION IN
THE PHILIPPINES

Juan, a Filipino citizen, runs a business in Manila, while his

cousin, Miguel, a Filipino working in the U.S., earns income
solely from his job abroad.
APPLICATION OF TERRITORIALITY:
❖ Juan's Obligation: Since Juan operates his business in the
Philippines, he must file tax returns and pay taxes on his
income. If he hires employees, he must also withhold and remit
their taxes to the government.

❖ Miguel's Obligation: Since Miguel earns his income from the

U.S., and does not generate income within the Philippines, the
Philippine government cannot impose taxes on his foreign
earnings. However, if he has income sources within the
Philippines (e.g., rental income from a property in Manila), he
would be subject to Philippine taxes on that income.
 EXCEPTION TO THE
TERRITORIALITY PRINCIPLE

1. In INCOME TAXATION, resident citizens and

domestic corporations are taxable on income
derived both within and outside the Philippines.
2. In TRANSFER TAXATION, residents or citizens
such as resident citizens, nonresident citizens and
resident aliens are taxable on transfers of
properties located within or outside the
Philippines.
SCENARIO:INCOME TAXATION
Resident Citizen: Maria is a Filipino citizen living and working in
the Philippines. She also owns a business in the U.S. that generates
income there.

Domestic Corporation: ABC Corporation is a Philippine-based

company. It earns income from its operations within the
Philippines and also earns revenue from selling products to
international clients.
2. INTERNATIONAL COMITY
- is the principle of mutual respect and reciprocity among sovereign
nations, recognizing that all countries are equal regardless of differences
in race, religion, economy, or military power.

KEY APPLICATIONS IN TAXATION:

1. Governments do not tax the income or properties of
other governments.
2. Treaty obligations take precedence over domestic tax
laws.
In the Philippines, embassies, consular offices, international organizations,
and their foreign staff are exempt from income and property taxes.
Additionally, foreign governments and their state-owned corporations are
not subject to Philippine income tax. When a country enters into a treaty, it
must uphold the agreement, even if it conflicts with local tax laws.
SCENARIO: INTERNATIONAL COMITY
IN TAXATION
A Japanese diplomat working at the Embassy of Japan in Manila is
paid by the Japanese government. The Philippine government
does not tax the diplomat’s salary because it follows the principle
of international comity—respecting the sovereignty of other
nations.
APPLICATION OF INTERNATIONAL COMITY
IN TAXATION
1. Governments don’t tax other governments – Since the salary
comes from Japan, the Philippines cannot tax it.

2. Tax treaties override local tax laws – If there’s a tax treaty,

Japan has the right to tax its diplomat, not the Philippines.

This ensures fairness and good diplomatic relations between

countries.
3. PUBLIC PURPOSE
Tax is intended for the common good. Taxation
must be exercised absolutely for public purpose. It
cannot be exercised to further any private
interest.

SCENARIO:
The Philippine government introduces a tax on
luxury goods (like expensive cars and jewelry).
The money raised is used to build public schools,
hospitals, and roads.
APPLICATION:PUBLIC PURPOSE

❖ Tax for the common good – The money is spent on things

that help everyone, like better schools and healthcare.

❖ No private benefit – The tax cannot be used for private

projects that only help a few people. This ensures taxes are
used for the public’s benefit.
4. EXEMPTION OF THE GOVERNMENT
The government generally does not tax itself, as doing so would only create
additional costs without raising funds. Under the NIRC (National Internal
Revenue Code), government properties and income from essential public
functions are exempt from taxation. However, income from profit-driven
activities—including those of government-owned and controlled
corporations (GOCCs)—is subject to tax.
SCENARIO: EXEMPTION OF THE GOVERNMENT
IN TAXATION
The Philippine government owns land used for public housing. It
doesn’t pay property tax on this land because it’s for a public purpose
—helping people with housing.

However, the government also runs a restaurant through a government

corporation (like FCP). This restaurant makes money by selling food, so
the government pays taxes on the income it earns from the restaurant.
APPLICATION: EXEMPTION OF THE
GOVERNMENT IN TAXATION

1. NO TAX ON PUBLIC USE – Land used for housing is tax-

exempt.

2. TAX ON PROFIT-MAKING – Income from the restaurant

is taxable since it's a business.
5. NON-DELEGATION OF THE TAXING POWER
- Congress exclusively holds the power to impose taxes, as part
of the principle of separation of powers. This ensures checks and
balances in the government. The power to tax cannot be further
delegated, as it was given by the people to the legislature.

EXCEPTIONS INCLUDE:
1. Local government units (LGUs) can tax to exercise fiscal
autonomy.
2. The President can adjust tariffs under the Tariff and Customs
Code based on trade conditions.
3. Certain cases may allow delegation for efficient tax
administration.
SCENARIO: NON-DELEGATION OF THE TAXING
POWER

The Philippine Congress is responsible for creating

laws about taxes, such as the income tax. However, it
cannot delegate this responsibility to local
government units or private groups.
APPLICATION: NON-DELEGATION OF THE TAXING
POWER

EXCEPTIONS:
1. Local Government Units (LGUs) like a city council in Manila can
impose local taxes, such as property taxes, to support their budget.

2. The President can set tariffs on imported goods based on trade needs,
like adjusting rates on certain products.

3. In some cases, tax agencies may be given some power to handle the
collection and enforcement of taxes for better efficiency.
B. CONSTITUTIONAL LIMITATIONS
1. OBSERVANCE OF DUE PROCESS OF LAW
- no one should lose their life, liberty, or property without a fair legal process. Tax laws
must be fair, not harsh or oppressive.

ASPECTS OF DUE PROCESS:

1. Substantive Due Process – Taxes must be for public purposes, based on a valid
law, and enforced by the proper taxing authority. Any tax assessment without
legal grounds violates due process.

2. Procedural Due Process – Tax assessments and collections must be fair.

Taxpayers have the right to notice and hearing, and there are specific procedures
that must be followed.

FOR EXAMPLE: Under the NIRC, assessments must be made within three years, and
collections within five years. Failing to follow these procedures violates due process.
SCENARIO: OBSERVANCE OF DUE PROCESS OF
LAW IN TAXATION

Maria, a small business owner, gets a notice from

the BIR saying she owes extra taxes. However, the
notice doesn’t explain why or show the legal basis
for the tax.
APPLICATION: OBSERVANCE OF DUE PROCESS OF
LAW
❖ DUE PROCESS:

1. Substantive Due Process – The BIR must have a valid law to back
up the tax assessment. If there's no legal basis, the assessment is invalid.

2. Procedural Due Process – The BIR must follow rules like giving
Maria proper notice and a chance to explain. They also need to issue the
assessment within three years and collect the tax within five years. If
they don’t follow these rules, it’s a violation of due process. Maria can
challenge the tax if the BIR doesn't follow the proper steps or explain
why the tax is being assessed.
2. EQUAL PROTECTION OF THE LAW
- ensures that taxpayers are treated equally in terms of both
rights and obligations. This principle applies when taxpayers are
in similar situations. For example, Congress cannot exempt sellers
of "balot" from tax while taxing sellers of "penoy" because they
are essentially selling the same type of product.
SCENARIO: EQUAL PROTECTION OF THE LAW
CASE 1:
A municipality imposes a vehicle tax but exempts electric cars while
charging taxes on regular cars. This could be seen as unequal because
both are types of vehicles, and they should be treated the same under
the tax law.

CASE 2:
A local government imposes a business tax on restaurants but
exempts fast food chains. Since both are types of food establishments,
the tax should be the same for all, regardless of the type of restaurant.
3. UNIFORMITY RULE IN TAXATION
- ensures taxes are fair and applied consistently. Taxpayers
in similar situations are taxed the same, while those in different
circumstances may face different tax rates. Taxpayers are
grouped based on relevant differences, and each group is taxed
accordingly, ensuring relative equality in taxation.
SCENARIO: UNIFORMITY RULE IN
TAXATION
Ana runs a small local coffee shop, while Ben owns
a big restaurant chain. Both businesses make
money, but Ana’s shop is smaller than Ben’s.
APPLICATION OF THE UNIFORMITY RULE
❖ Ana might pay less tax because her business is small,
while Ben pays more tax because his restaurant
chain is larger and earns more.

❖ Same Tax for Similar Businesses: If Ana opens

another coffee shop, it will pay the same tax as her
first shop, and Ben’s restaurants will all pay the
same tax.
4. PROGRESSIVE SYSTEM
OF TAXATION

- tax rates increase as a person's income or

wealth rises. This system is designed to be
fair, as it taxes people based on their ability
to pay, taking more from the wealthy and
less from the poor. It also helps achieve a
more equitable distribution of wealth in
society.
SCENARIO: PROGRESSIVE SYSTEM OF
TAXATION

Maria earns ₱20,000 a month, while Juan earns

₱100,000 a month.

APPLICATION:

❖ Maria pays a lower tax rate because her income is

smaller.
❖ Juan pays a higher tax rate because his income is larger.
5. NON-IMPRISONMENT FOR
NON-PAYMENT OF DEBT OR
POLL TAX
- policy ensures that no one can be jailed just for being
unable to pay debts or taxes due to poverty. However, if
the debt is incurred in bad faith (e.g., fraud), it can lead
to a criminal offense like estafa, which is punishable by
imprisonment.
NON-PAYMENT OF TAX IS NOT THE SAME AS NON-PAYMENT OF
DEBT
- taxes are imposed by the government for public interest, while debts arise
from private contracts. Non-payment of tax is considered more serious and is
treated similarly to a crime, whereas non-payment of debt only affects private
interests.

The Constitutional guarantee against imprisonment for non-payment applies

to debts, but not to taxes, except for the poll tax.

POLL TAX HAS TWO PARTS:

1. Basic community tax (non-payment is not punishable by imprisonment).
2. Additional community tax (non-payment is considered tax evasion,
punishable by imprisonment).
SCENARIO: NON-PAYMENT OF TAX VS.
DEBT
CASE 1:
Juan owes ₱10,000 for personal debt but can't pay it due to
financial problems. Since his debt is a private matter, he won’t be
jailed for non-payment unless it was obtained in bad faith.

CASE 2:
Maria doesn’t pay her poll tax (a small community tax). If she
doesn’t pay the basic tax, she won't be jailed. But if she avoids
paying the additional community tax, it’s considered tax evasion
and could lead to imprisonment.
6. NON-IMPAIRMENT OF
OBLIGATION AND CONTRACT

-the government must honor its contracts and

obligations in good faith. It cannot cancel or
change tax exemptions granted under a
contract through unilateral actions. The State
should respect agreements and not use its taxing
power to disregard them.
SCENARIO: NON-IMPAIRMENT OF OBLIGATION
AND CONTRACT

CASE:
ABC Corp signs a contract with the government for a tax
exemption for 5 years. After 3 years, the government
decides to cancel the exemption.

APPLICATION:
The government cannot cancel the tax exemption on its
own. Since it was part of a contract, the government must
keep its promise and honor the agreement.
7. FREE WORSHIP RULE
- allows individuals and religious institutions
to practice their religion without
interference from taxation. Religious
properties and revenues (like tithes and
offerings) are exempt from taxes. However,
income from commercial activities or
properties used for business purposes by
religious institutions is subject to tax.
SCENARIO: FREE WORSHIP RULE
Case 1:
A church receives tithes and donations from its
members. These funds are not taxed because they are
part of religious practice.
Case 2:
The same church owns a cafe inside its building that
earns money from customers. The income from the cafe
is taxed because it's a commercial activity, not related
to religious worship.
8. EXEMPTION OF RELIGIOUS, CHARITABLE OR
EDUCATIONAL ENTITIES, NON-PROFIT CEMETERIES,
CHURCHES AND MOSQUES, LANDS, BUILDINGS, AND
IMPROVEMENTS FROM PROPERTY TAXES

In the Philippines, religious, charitable, and educational entities

are exempt from property taxes only if their properties are exclusively
used for charitable, religious, or educational purposes. The exemption
is based on the doctrine of use, meaning the property must be used
primarily for these activities. The doctrine of ownership, which would
exempt properties just because they belong to these entities, does not apply
in the Philippines.
SCENARIO: EXEMPTION OF RELIGIOUS, CHARITABLE, AND
EDUCATIONAL ENTITIES FROM PROPERTY TAXES

CASE 1:
A church owns a building that is used only for worship services.
This property is exempt from property tax because it is used
exclusively for religious purposes.
Case 2:
The same church also rents out part of the building for events
or parties. Since this portion is used for commercial purposes, it
is not exempt from property tax.
9. NON-APPROPRIATION OF PUBLIC
FUNDS FOR RELIGIOUS PURPOSES
- ensures the separation of religion and state.
The government cannot use public funds or
property to support any specific religion.
However, payments to religious ministers
working in public institutions like the military,
prisons, or orphanages are not considered
religious appropriation.
SCENARIO: NON-APPROPRIATION OF PUBLIC
FUNDS FOR RELIGIOUS PURPOSES
Case 1:
The government cannot give money to a specific church to support
its activities because this would favor one religion over others.

Case 2:
However, the government can pay a priest working in a military
hospital to provide spiritual support to soldiers. This is allowed
because the priest’s work is for public service, not religious
promotion.
10. EXEMPTION FROM TAXES OF THE REVENUES
AND ASSETS OF NON-PROFIT, NON-STOCK
EDUCATIONAL INSTITUTIONS INCLUDING GRANTS,
ENDOWMENTS, DONATIONS, OR CONTRIBUTIONS
FOR EDUCATIONAL PURPOSES
- are exempt from taxes on their revenues and assets, but
only if they are used solely for educational purposes.
Donations or grants for education are also tax-exempt.
Government schools are fully tax-exempt, while private
schools pay only a minimal income tax under the NIRC.
SCENARIO: TAX EXEMPTION FOR
EDUCATIONAL INSTITUTIONS

CASE 1:
A non-profit university uses all its income to improve school
facilities and provide scholarships. Since the funds are used only
for education, the university is exempt from taxes.

CASE 2:
The same university rents out a portion of its building for a
coffee shop. Since this part of the income is not for education, it
is subject to tax.
11. CONCURRENCE OF A MAJORITY OF ALL MEMBERS OF
CONGRESS FOR THE PASSAGE OF A LAW GRANTING TAX
EXEMPTION
- a tax exemption law reduces government revenue, so it must have a
valid reason. To ensure fairness, the Constitution requires an absolute
majority (more than half of all members of Congress) to approve it.
However, removing a tax exemption only needs a relative majority
(more votes in favor than against).
SCENARIO: PASSING A TAX EXEMPTION
LAW
CASE 1:
Congress wants to exempt farmers from certain taxes to support
agriculture. To approve this tax exemption, more than half of all
members of Congress must vote in favor.

CASE 2:
Years later, the government decides to remove the tax exemption
due to revenue needs. This time, only a simple majority (more
votes in favor than against) is needed.
12. NON-DIVERSIFICATION OF TAX
COLLECTIONS

- Tax collections should be used only for public

purpose. It should never be diversified or used for
private purpose.
SCENARIO: NON-DIVERSIFICATION OF TAX
COLLECTIONS
CASE 1:
The government collects taxes to build roads, schools, and
hospitals. Since these benefit the public, this is a proper use of tax
collections.

CASE 2:
A government official uses tax money to fund a private business.
This is not allowed because taxes must only be used for public
purposes, not personal gain.
13. NON-DELEGATION OF THE
POWER OF TAXATION
The power of taxation belongs exclusively to
Congress as part of lawmaking. However,
certain non-legislative functions related to tax
administration and collection can be delegated.
Agencies like the Department of Finance and
BIR can issue rules and regulations to clarify tax
laws but cannot create new tax laws.
SCENARIO: NON-DELEGATION OF THE POWER OF
TAXATION

CASE 1:
Only Congress can pass a law imposing a new tax. A government
agency like the BIR cannot create a new tax on its own.

CASE 2:
However, the BIR can issue a revenue regulation explaining how an
existing tax should be collected. This is allowed because it only clarifies
the law, not creates a new one.
14. NON-IMPAIRMENT OF THE
JURISDICTION OF THE SUPREME
COURT TO REVIEW TAX CASES

Notwithstanding the existence of

the Court of Tax Appeals, which is a
special court, all cases involving taxes
can be raised to and be finally decided by
the Supreme Court of the Philippines.
SCENARIO: NON-IMPAIRMENT OF THE JURISDICTION OF
THE SUPREME COURT TO REVIEW TAX CASES

CASE 1:
A company disagrees with a tax assessment made by the Bureau of
Internal Revenue (BIR). It goes to the Court of Tax Appeals (CTA) and
wins the case. However, the BIR believes the decision is wrong and
asks the Supreme Court to review it. The Supreme Court has the final
say, even though the CTA already ruled.
CASE 2:
A taxpayer loses their case in the Court of Tax Appeals and wants to
appeal the decision. The taxpayer can still bring the case to the
Supreme Court, which has the authority to decide the case finally, no
matter the decision of the lower court.
15. APPROPRIATIONS, REVENUE, OR TARIFF
BILLS SHALL ORIGINATE EXCLUSIVELY IN THE
HOUSE OF REPRESENTATIVES, BUT THE
SENATE MAY PROPOSE OR CONCUR WITH
AMENDMENTS.

Tax, revenue, and tariff bills must originate from the

House of Representatives, but the Senate can
propose changes or amendments. However, the final
law does not have to match the original House
version, as long as the bill started in the House. The
Supreme Court has upheld this process, even when
the Senate made major changes to a tax bill.
SCENARIO: ORIGINATION OF TAX AND REVENUE
BILLS

CASE 1:
The House of Representatives proposes a new tax bill to
increase government revenue. Since it involves taxation, it
must start in the House.

CASE 2:
The Senate reviews the bill and suggests changes, such as
adjusting the tax rates. After both chambers agree on a final
version, the bill is sent to the President for approval.
16. EACH LOCAL GOVERNMENT
UNIT SHALL EXERCISE THE POWER
A CREATE ITS OWN SOURCES OF
REVENUE AND SHALL HAVE A JUST
SHARE IN THE NATIONAL TAXES

Each local government unit (LGU) has the

authority to generate its own revenue and is
entitled to a fair share of the national taxes.
This reflects the constitutional principle of
local autonomy and the delegation of taxing
power to LGUs.
SCENARIO: LOCAL GOVERNMENT'S TAXING
POWER
CASE 1:
A city government decides to impose a local business tax on
businesses within its area to generate revenue for local services
like roads and schools.

Case 2:
The same city receives a portion of the national taxes collected
by the government, which helps fund local projects and
development.
rL i s t e n i n g
PREPARED BY: AURIBETH LAPITAN and RAFFY A. SANTOS
Instructor